Short-Term Finance Explained
As is typical in the short-term finance market place, the interest rate and fee setting policy will depend on the risk level associated with each individual application.
Due to the speed in which short-term finance is normally required, a network of specialised professionals is needed to complete the loan. Therefore, short-term finance carries a premium in comparison to other types of secured lending.
Bridging loans or bridging finance are two of the most common terms used when referring to short term finance. Using bridging finance as a short term finance solution can prove beneficial for a wide range of funding requirements. With a variety of bridging loans currently available, investors are able to select the bridging finance that best suits their needs and enables them to have access to the required funds quickly.
Bridging Finance facilities are short term, usually between 1 and 12 months secured against residential or commercial property on a first or second charge basis. Whilst a bridging loan application is typically processed and completed in a much shorter timeframe than other loans, the due diligence process is no less rigorous. The Lender will interview the borrower, conduct their enquiries into the borrower’s circumstances and obtain a detailed independent valuation of the property offered as security.
Bridging loans are usually up to 75% of the open market value of the property. This percentage is commonly known as the Loan to Value or LTV. They can be secured against residential properties, investment properties, commercial properties or land.
Typically all interest and other fees are deducted from the gross loan advance providing the borrower with a net amount. Alternatively, given sufficient equity in the property all interest and other fees can be rolled up and added to the loan. These form part of the overall redemption figure and are then settled at the end of the term of the loan.
Interest rates for first charge short-term lending are structured at a premium to reflect the risk profile of the loan, the quality of the security offered and the speed at which the loan is required by the borrower. Second charge lending is charged at a higher rate. The greater the LTV the higher risk to the lender and hence the higher the interest rate.
Bridging Finance can be arranged by banks, private finance companies or through specialist Bridging Loan Brokers. Banks are very conservative and tend to take longer to set up bridging loans. Private finance houses are quicker and can often lend on a limited or non-status basis.
There are a number of reasons to use bridging loans, the main reason is the speed with which they can be drawn down. All the loan requirements below are suitable for bridging finance, however the potential uses for bridging loans are far more extensive.
- To take advantage of an opportunity which requires a quick settlement (E.g. purchasing from a receiver);
- To finance the purchase of a property at auction;
- To fund the refurbishment of a property;
- To raise short-term finance capital against equity in a property.
Fees Associated With Bridging Finance
A RICS survey for the property will be required. The price will vary depending on the value of the property, the higher the value of the property the higher the valuation fee. Commercial valuations are more costly than a residential property valuation.
The borrower will have to pay for their legal costs AND the lenders legal costs.
Arrangement fees of between 1% and 2% of the loan amount. On some products there can be exit fees paid when the loan is redeemed.
There are two main types of bridging loans; a ‘closed bridge’ and an ‘open bridge’.
A ‘closed bridge’ refers to a bridging loan where there is a predefined and planned exit that the borrower has in place to repay the loan, this is identified before the bridging loan is taken out.
In this instance, the borrower knows a source of funds will be available before the end of the bridge period. However, if the nature of their funding requires them to settle a transaction quickly or capitalise on a particular opportunity within a short time-scale the borrower may still require the bridging loan.
An ‘open bridge’ is a bridging loan where the borrower does not have a defined exit in place. Although bridging finance lenders normally require a detailed exit strategy, with an open bridging loan the exit strategy is not certain.
An open bridging loan can be required when the borrower needs to settle a transaction in a very short time period, and has not had the time to arrange funding. In these instances however, the borrower may have a longstanding relationship with a mainstream lender that is very likely to advance the loan, but the borrower has not had time to submit an application.
It may also be that the borrower’s planned exit from the bridging loan is by the sale of the property, this has become more common in recent times due to the lack of long term finance facilities offered by the banks. This type is bridging loan is ‘open’ whilst a buyer is sought.
Property and land development often requires a mix of short- and long-term finance to acquire sites, build new properties, refurbish existing properties and purchase land.
Cowan Investments can help fund development projects ranging from small-scale refurbishments to multi-million pound new-build complexes.
Loan-to-value parameters and the interest rates which are incurred vary according to developer experience, project type and loan size.